TEMPLETON VARIABLE PRODUCTS SERIES FUND
THIS STATEMENT OF ADDITIONAL INFORMATION DATED MAY 1, 1995, IS
NOT A PROSPECTUS. IT SHOULD BE READ IN CONJUNCTION
WITH THE PROSPECTUS OF TEMPLETON VARIABLE PRODUCTS SERIES
FUND DATED MAY 1, 1995, WHICH MAY BE OBTAINED WITHOUT
CHARGE UPON REQUEST TO FRANKLIN TEMPLETON DISTRIBUTORS, INC.,
700 CENTRAL AVENUE, P.O. BOX 33030,
ST. PETERSBURG, FLORIDA 33733-8030
TOLL FREE TELEPHONE: (800) 292-9293.
TABLE OF CONTENTS
General Information and History. . . . . . . . . . . 1
Investment Objectives and Policies . . . . . . . . . 1
-Investment Policies. . . . . . . . . . . . . . . . 1
-Futures Contracts . . . . . . . . . . . . . . . . 1
-Foreign Currency Hedging Transactions. . . . . . . 2
-Stock Index Futures Contracts. . . . . . . . . . . 4
-Risk Factors . . . . . . . . . . . . . . . . . . . 6
Investment Restrictions. . . . . . . . . . . . . . . 10
Trading Policies . . . . . . . . . . . . . . . . . . 12
-Personal Securities Transactions . . . . . . . . 12
Management of the Trust. . . . . . . . . . . . . . . 13
Trustee Compensation . . . . . . . . . . . . . . . . 19
Principal Shareholders . . . . . . . . . . . . . . . 20
Investment Management and Other Services . . . . . . 21
-Investment Management Agreements . . . . . . . . . 21
-Management Fees. . . . . . . . . . . . . . . . . . 23
-The Investment Managers. . . . . . . . . . . . . . 23
-Research Services. . . . . . . . . . . . . . . . . 23
-Business Manager . . . . . . . . . . . . . . . . . 23
-Custodian. . . . . . . . . . . . . . . . . . . . . 25
-Legal Counsel. . . . . . . . . . . . . . . . . . . 25
-Independent Accountants. . . . . . . . . . . . . . 25
-Reports to Shareholders. . . . . . . . . . . . . . 25
Brokerage Allocation . . . . . . . . . . . . . . . . 25
-Portfolio Turnover . . . . . . . . . . . . . . . . 28
Purchase and Redemption of Shares;
Net Asset Value . . . . . . . . . . . . . . . . . . 29
Tax Status . . . . . . . . . . . . . . . . . . . . . 31
Description of Shares. . . . . . . . . . . . . . . . 35
Yield and Performance Information. . . . . . . . . . 36
Financial Statements . . . . . . . . . . . . . . . . 40
Appendix - Corporate Bond, Preferred
Stock and Commercial Paper Ratings . . . . . . . . i
GENERAL INFORMATION AND HISTORY
Templeton Variable Products Series Fund (the "Trust") was organized as a
Massachusetts business trust on February 25, 1988 and is registered under the
Investment Company Act of 1940 (the "1940 Act") as an open-end diversified
management investment company. The Trust currently has five series of Shares:
Templeton Money Market Fund, Templeton Bond Fund, Templeton Stock Fund,
Templeton Asset Allocation Fund and Templeton International Fund
(collectively, the "Funds").
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INVESTMENT OBJECTIVES AND POLICIES
INVESTMENT POLICIES. The investment objective and policies of each Fund
are described in the Prospectus under the heading "Investment Objectives and
Policies."
FUTURES CONTRACTS. Templeton Bond, Asset Allocation and International
Funds may purchase and sell financial futures contracts. Currently, futures
contracts are available on several types of fixed-income securities including:
U.S. Treasury bonds, notes and bills, commercial paper, and certificates of
deposit.
As long as required by regulatory authorities, Templeton Bond, Asset
Allocation and International Funds will limit their use of futures contracts
to hedging transactions in order to avoid being a commodity pool. For
example, they might use futures contracts to hedge against anticipated changes
in interest rates that might adversely affect either the value of the Funds'
securities or the price of the securities which the Funds intend to purchase.
The Funds' hedging may include sales of futures contracts as an offset against
the effect of expected increases in interest rates and purchases of futures
contracts as an offset against the effect of expected declines in interest
rates. Although other techniques could be used to reduce the Funds' exposure
to interest rate fluctuations, they may be able to hedge their exposure more
effectively and perhaps at a lower cost by using futures contracts.
At the time a Fund purchases or sells a futures contract, it is required
to deposit with its custodian (or broker, if legally permitted) a specified
amount of cash or U.S. Government securities ("initial margin"). The margin
required for a futures contract is set by the exchange or board of trade on
which the contract is traded and may be modified during the term of the
contract. The initial margin is in the nature of a performance bond or good
faith deposit on the futures contract which is returned to the Fund upon
termination of the contract, assuming all contractual obligations have been
satisfied. The Funds expect to earn interest income on initial margin
deposits. A futures contract held by a Fund is valued daily at the official
settlement price of the exchange on which it is traded. Each day the Funds
pay or receive cash, called "variation margin," equal to the daily change in
value of the futures contract. This process is known as "marking to market."
Variation margin does not represent a borrowing or loan by a Fund but is
instead settlement between the Fund and the broker of the amount one would owe
the other if the futures contract expired. In computing daily net asset
value, a Fund will mark to market its open futures positions. In addition,
the Fund must deposit in a segregated account additional cash or high quality
debt securities to ensure the futures contracts are unleveraged. The value of
assets held in the segregated account must be equal to the daily market value
of all outstanding futures contracts less any amounts deposited as margin.
Although some financial futures contracts call for making or taking
delivery of the underlying securities, in most cases these obligations are
closed out before the settlement date. The closing of a contractual
obligation is accomplished by purchasing or selling an identical offsetting
futures contract. Other financial futures contracts by their terms call for
cash settlements.
FOREIGN CURRENCY HEDGING TRANSACTIONS. In order to hedge against
foreign currency exchange rate risks, Templeton Bond and Asset Allocation
Funds may enter into forward foreign currency exchange contracts, as well as
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purchase put or call options on foreign currencies. In addition, for hedging
purposes only, Templeton Bond, Asset Allocation and International Funds may
enter into foreign currency futures contracts, as described below. The Funds
may also conduct their foreign currency exchange transactions on a spot (I.E.,
cash) basis at the spot rate prevailing in the foreign currency exchange
market.
A Fund may enter into forward foreign currency exchange contracts
("forward contracts") to attempt to minimize the risk to the Fund from adverse
changes in the relationship between the U.S. dollar and foreign currencies. A
forward contract is an obligation to purchase or sell a specific currency for
an agreed price at a future date which is individually negotiated and
privately traded by currency traders and their customers. A Fund may enter
into a forward contract, for example, when it enters into a contract for the
purchase or sale of a security denominated in a foreign currency in order to
"lock in" the U.S. dollar price of the security. In addition, for example,
when a Fund believes that a foreign currency may suffer a substantial decline
against the U.S. dollar, it may enter into a forward contract to sell an
amount of that foreign currency approximating the value of some or all of the
Fund's portfolio securities denominated in such foreign currency, or when a
Fund believes that the U.S. dollar may suffer a substantial decline against a
foreign currency, it may enter into a forward contract to buy that foreign
currency for a fixed dollar amount. This second investment practice is
generally referred to as "cross-hedging." Because in connection with a Fund's
forward foreign currency transactions an amount of the Fund's assets equal to
the amount of the purchase will be held aside or segregated to be used to pay
for the commitment, a Fund will always have cash, cash equivalents or high
quality debt securities available sufficient to cover any commitments under
these contracts or to limit any potential risk. The segregated account will
be marked-to-market on a daily basis. While these contracts are not presently
regulated by the Commodity Futures Trading Commission ("CFTC"), the CFTC may
in the future assert authority to regulate forward contracts. In such event,
a Fund's ability to utilize forward contracts in the manner set forth above
may be restricted. Forward contracts may limit potential gain from a positive
change in the relationship between the U.S. dollar and foreign currencies.
Unanticipated changes in currency prices may result in poorer overall
performance for a Fund than if it had not engaged in such contracts.
Templeton Bond and Asset Allocation Funds may purchase and write put and
call options on foreign currencies for the purpose of protecting against
declines in the dollar value of foreign portfolio securities and against
increases in the dollar cost of foreign securities to be acquired. As is the
case with other kinds of options, however, the writing of an option on foreign
currency will constitute only a partial hedge, up to the amount of the premium
received, and a Fund could be required to purchase or sell foreign currencies
at disadvantageous exchange rates, thereby incurring losses. The purchase of
an option on foreign currency may constitute an effective hedge against
fluctuation in exchange rates, although, in the event of rate movements
adverse to a Fund's position, the Fund may forfeit the entire amount of the
premium plus related transaction costs. Options on foreign currencies to be
written or purchased by a Fund will be traded on U.S. and foreign exchanges or
over-the-counter.
Templeton Bond, Asset Allocation and International Funds may enter into
exchange-traded contracts for the purchase or sale for future delivery of
foreign currencies ("foreign currency futures"). This investment technique
will be used only to hedge against anticipated future changes in exchange
rates which otherwise might adversely affect the value of a Fund's portfolio
securities or adversely affect the prices of securities that a Fund intends to
purchase at a later date. The successful use of foreign currency futures will
usually depend on the ability of a Fund's Investment Manager to forecast
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currency exchange rate movements correctly. Should exchange rates move in an
unexpected manner, a Fund may not achieve the anticipated benefits of foreign
currency futures or may realize losses.
STOCK INDEX FUTURES CONTRACTS. Templeton Stock, Asset Allocation and
International Funds may buy and sell index futures contracts with respect to
any stock index, and Templeton Bond Fund may buy and sell index futures
contracts with respect to any bond index traded on a recognized stock exchange
or board of trade. The Funds may invest in index futures contracts for
hedging purposes only, and not for speculation. A Fund may engage in such
transactions only to an extent that the total contract value of the futures
contracts do not exceed 20% of the Fund's total assets at the time when such
contracts are entered into. Successful use of stock index futures is subject
to the ability of Templeton Investment Counsel, Inc. (the Investment Manager
of Templeton Stock Fund, Templeton Asset Allocation Fund, and Templeton
International Fund) and the Templeton Global Bond Managers division of
Templeton Investment Counsel, Inc. (the Investment Manager of Templeton Bond
Fund and Templeton Money Market Fund) (collectively, the "Investment
Managers") to predict correctly movements in the direction of the stock
markets. No assurance can be given that the Investment Manager's judgment in
this respect will be correct.
A stock index futures contract is a contract to buy or sell units of a
stock index at a specified future date at a price agreed upon when the
contract is made. The value of a unit is the current value of the stock
index. For example, the Standard & Poor's Stock Index ("S&P 500 Index" or
"Index") is composed of 500 selected common stocks, most of which are listed
on the New York Stock Exchange. The S&P 500 Index assigns a relative weighing
to the value of one share of each of these 500 common stocks included in the
Index, and the Index fluctuates with changes in the market values of the
shares of those common stocks. In the case of the S&P 500 Index, contracts
are to buy or sell 500 units. Thus, if the value of the S&P 500 Index were
$150, one contract would be worth $75,000 (500 units x $150). The stock index
futures contract specifies that no delivery of the actual stocks making up the
index will take place. Instead, settlement in cash must occur upon the
termination of the contract, with the settlement being the difference between
the contract price and the actual level of the stock index at the expiration
of the contract. For example, if a Fund enters into a futures contract to buy
500 units of the S&P 500 Index at a specified future date at a contract price
of $150 and the S&P 500 Index is at $154 on that future date, the Fund will
gain $2,000 (500 units x gain of $4). If a Fund enters into a futures
contract to sell 500 units of the stock index at a specified future date at a
contract price of $150 and the S&P 500 Index is at $154 on the future date,
the Fund will lose $2,000 (500 units x loss of $4).
During or in anticipation of a period of market appreciation, Templeton
Stock Fund, Templeton Asset Allocation Fund or Templeton International Fund
may enter into a "long hedge" of common stock which it proposes to add to its
portfolio by purchasing stock index futures for the purpose of reducing the
effective purchase price of such common stock. To the extent that the
securities which a Fund proposes to purchase change in value in correlation
with the stock index contracted for, the purchase of futures contracts on that
index would result in gains to the Fund which could be offset against rising
prices of such common stock.
During or in anticipation of a period of market decline, Templeton Stock
Fund, Templeton Asset Allocation Fund or Templeton International Fund may
"hedge" common stock in its portfolio by selling stock index futures for the
purpose of limiting the exposure of its portfolio to such decline. To the
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extent that a Fund's portfolio of securities changes in value in correlation
with a given stock index, the sale of futures contracts on that index could
substantially reduce the risk to the portfolio of a market decline and, by so
doing, provide an alternative to the liquidation of securities positions in
the portfolio with resultant transaction costs.
RISK FACTORS. Templeton Bond Fund, Templeton Stock Fund, Templeton Asset
Allocation Fund and Templeton International Fund have an unlimited right to
purchase securities in any foreign country, developed or developing, if they
are listed on an exchange, as well as a limited right to purchase such
securities if they are unlisted. Investors should consider carefully the
risks involved in securities of companies and governments of foreign nations,
which are in addition to the usual risks inherent in domestic investments.
Investments in companies domiciled in developing countries may be
subject to potentially higher risks than investments in developed countries.
These risks include (i) less social, political and economic stability; (ii)
the small current size of the markets for such securities and the currently
low or nonexistent volume of trading, which result in a lack of liquidity and
in greater price volatility; (iii) certain national policies which may
restrict the Funds' investment opportunities, including restrictions on
investment in issuers or industries deemed sensitive to national interests;
(iv) foreign taxation; (v) the absence of developed structures governing
private or foreign investment or allowing for judicial redress for injury to
private property; (vi) the absence, until recently in certain Eastern European
countries, of a capital market structure or market-oriented economy; and (vii)
the possibility that recent favorable economic developments in Eastern Europe
may be slowed or reversed by unanticipated political or social events in such
countries.
Despite the recent dissolution of the Soviet Union, the Communist Party
may continue to exercise a significant role in certain Eastern European
countries. To the extent of the Communist Party's influence, investments in
such countries may involve risks of nationalization, expropriation and
confiscatory taxation. The communist governments of a number of Eastern
European countries expropriated large amounts of private property in the past,
in many cases without adequate compensation, and there can be no assurance
that such expropriation will not occur in the future. In the event of such
expropriation, the Funds could lose a substantial portion of any investments
it has made in the affected countries. Further, no accounting standards exist
in Eastern European countries. Finally, even though certain Eastern European
currencies may be convertible into U.S. dollars, the conversion rates may be
artificial to the actual market values and may be adverse to the Funds'
Shareholders.
There may be less publicly available information about foreign companies
comparable to the reports and ratings published about companies in the United
States. Foreign companies are not generally subject to uniform accounting,
auditing and financial reporting standards, and auditing practices and
requirements may not be comparable to those applicable to United States
companies. Foreign markets have substantially less volume than the New York
Stock Exchange, and securities of some foreign companies are less liquid and
more volatile than securities of comparable United States companies.
Commission rates in foreign countries, which are generally fixed rather than
subject to negotiation as in the United States, are likely to be higher. In
many foreign countries there is less government supervision and regulation of
stock exchanges, brokers and listed companies than in the United States.
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The Funds endeavor to buy and sell foreign currencies on as favorable a
basis as practicable. Some price spread on currency exchange (to cover
service charges) may be incurred, particularly when a Fund changes investment
from one country to another or when proceeds of the sale of Shares in U.S.
dollars are used for the purchase of securities in foreign countries. Also,
some countries may adopt policies which would prevent a Fund from transferring
cash out of the country or withhold portions of interest and dividends at the
source, or impose other taxes with respect to a Fund's investments in
securities of issuers of that country. There is the possibility of
expropriation, nationalization or confiscatory taxation, foreign exchange
controls (which may include suspension of the ability to transfer currency
from a given country), default in foreign government securities, political or
social instability or diplomatic developments which could affect investments
in securities of issuers in those nations.
Each Fund may be affected either unfavorably or favorably by
fluctuations in the relative rates of exchange between the currencies of
different nations, by exchange control regulations and by indigenous economic
and political developments. Through each Fund's flexible policy, the
Investment Managers endeavor to avoid unfavorable consequences and to take
advantage of favorable developments in particular nations where from time to
time it places a Fund's investments. The exercise of this flexible policy may
include decisions to purchase securities with substantial risk characteristics
and other decisions such as changing the emphasis on investments from one
nation to another and from one type of security to another. Some of these
decisions may later prove profitable and others may not. No assurance can be
given that profits, if any, will exceed losses.
The Trustees consider at least annually the likelihood of the imposition
by any foreign government of exchange control restrictions which would affect
the liquidity of the Funds' assets maintained with custodians in foreign
countries, as well as the degree of risk from political acts of foreign
governments to which such assets may be exposed. They also consider the
degree of risk involved through the holding of portfolio securities in
domestic and foreign securities depositories (see "Investment Management and
Other Services - Custodian"). However, in the absence of willful misfeasance,
bad faith or gross negligence on the part of the Investment Managers, or
reckless disregard of the obligations and duties under the Investment
Management Agreements, any losses resulting from the holding of a Fund's
portfolio securities in foreign countries and/or with securities depositories
will be at risk of the Shareholders. No assurance can be given that the
Trustees' appraisal of the risks will always be correct or that such exchange
control restrictions or political acts of foreign governments might not occur.
There are several risks associated with the use of futures contracts and
stock index futures contracts as hedging techniques. A purchase or sale of a
futures contract may result in losses in excess of the amount invested. There
can be significant differences between the securities and futures markets that
could result in an imperfect correlation between the markets, causing a given
hedge not to achieve its objectives. The degree of imperfection of
correlation depends on circumstances such as variations in speculative market
demand for futures, including technical influences in futures trading, and
differences between the financial instruments being hedged and the instruments
underlying the standard contracts available for trading in such respects as
interest rate levels, maturities, and creditworthiness of issuers. A decision
as to whether, when, and how to hedge involves the exercise of skill and
judgment, and even a well-conceived hedge may be unsuccessful to some degree
because of market behavior or unexpected interest rate trends.
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Futures exchanges may limit the amount of fluctuation permitted in
certain futures contract prices during a single trading day. The daily limit
establishes the maximum amount that the price of a futures contract may vary
either up or down from the previous day's settlement price at the end of the
current trading session. Once the daily limit has been reached in a futures
contract subject to the limit, no more trades may be made on that day at a
price beyond that limit. The daily limit governs only price movements during
a particular trading day and, therefore, does not limit potential losses
because the limit may work to prevent the liquidation of unfavorable
positions. For example, futures prices have occasionally moved to the daily
limit for several consecutive trading days with little or no trading, thereby
preventing prompt liquidation of positions and subjecting some holders of
futures contracts to substantial losses.
There can be no assurance that a liquid market will exist at a time when
a Fund seeks to close out a futures position, and it would remain obligated to
meet margin requirements until the position is closed. Templeton Bond, Stock,
Asset Allocation and International Funds intend to purchase or sell futures
only on exchanges or boards of trade where there appears to be an active
secondary market, but there is no assurance that a liquid secondary market
will exist for any particular contract or at any particular time. In
addition, many of the futures contracts available may be relatively new
instruments without a significant trading history. As a result, there can be
no assurance that an active secondary market will develop or continue to
exist.
Use of stock index futures for hedging may involve risks because of
imperfect correlations between movements in the prices of the stock index
futures on the one hand and movements in the prices of the securities being
hedged or of the underlying stock index on the other. Successful use of stock
index futures by a Fund for hedging purposes also depends upon the Investment
Manager's ability to predict correctly movements in the direction of the
market, as to which no assurance can be given.
Templeton Bond, Asset Allocation and International Funds may enter into
a contract for the purchase or sale of a security denominated in a foreign
currency and may enter into a forward foreign currency contract ("forward
contract") in order to "lock in" the U.S. dollar price of the security. In
addition, when the Investment Manager believes that the currency of a
particular foreign country may suffer or enjoy a substantial movement against
another currency, it may enter into a forward contract to sell or buy the
amount of the former foreign currency, approximating the value of some or all
of the Fund's portfolio securities denominated in such foreign currency. The
projection of short-term currency market movement is extremely difficult, and
the successful execution of a short-term hedging strategy is highly uncertain.
It is impossible to forecast with absolute precision the market value of
portfolio securities at the expiration of the contract. Accordingly, it may
be necessary for the Funds to purchase additional foreign currency on the spot
market (and bear the expense of such purchase) if the market value of the
security is less than the amount of foreign currency a Fund is obligated to
deliver and if a decision is made to sell the security and make delivery of
the foreign currency. Conversely, it may be necessary to sell on the spot
market some of the foreign currency received upon the sale of the portfolio
security if its market value exceeds the amount of foreign currency the Fund
is obligated to deliver.
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If a Fund retains the portfolio security and engages in an offsetting
transaction, the Fund will incur a gain or a loss to the extent that there has
been movement in forward contract prices. If a Fund engages in an offsetting
transaction, it may subsequently enter into a new forward contract to sell the
foreign currency. Should forward prices decline during the period between a
Fund entering into a forward contract for the sale of a foreign currency and
the date it enters into an offsetting contract for the purchase of the foreign
currency, the Fund will realize a gain to the extent the price of the currency
it has agreed to sell exceeds the price of the currency it has agreed to
purchase. Should forward prices increase, a Fund will suffer a loss to the
extent the price of the currency it has agreed to purchase exceeds the price
of the currency it has agreed to sell.
INVESTMENT RESTRICTIONS
The Funds have imposed upon themselves certain investment restrictions
which, together with their investment objectives, are fundamental policies
except as otherwise indicated. No changes in a Fund's investment objectives,
policies or investment restrictions (except those which are not fundamental
policies) can be made without the approval of the Shareholders of that Fund.
For this purpose, the provisions of the 1940 Act require the affirmative vote
of the lesser of either (a) 67% or more of the Fund's Shares present at a
Shareholders' meeting at which the holders more than 50% of the outstanding
Shares are present or represented by proxy or (b) more than 50% of the
outstanding Shares of the Fund.
In accordance with these restrictions, a Fund will not:
1. Invest in real estate or mortgages on real estate, or purchase or
sell commodity contracts, except that Templeton Bond and Asset
Allocation Funds may invest in marketable securities secured by
real estate or interests therein, such as CMOs, or issued by
companies or investment trusts which invest in real estate or
interests therein and Templeton Bond, Asset Allocation and
International Funds may purchase and sell foreign currency futures
and financial futures, and Templeton Stock, Asset Allocation and
International Funds may purchase and sell stock index futures
contracts, and Templeton Bond Fund may purchase and sell bond
index futures contracts.
2. With respect to 75% of its total assets, invest more than 5% of
the total value of its assets in the securities of any one issuer,
or purchase more than 10% of any class of securities of any one
company, including more than 10% of its outstanding voting
securities (except for investments in obligations issued or
guaranteed by the U.S. Government or its agencies or
instrumentalities).
3. Act as an underwriter or issue senior securities.
4. Lend money, except that all Funds may purchase publicly
distributed bonds, debentures, notes and other evidences of
indebtedness and may buy from a bank or broker-dealer U.S.
Government obligations with a simultaneous agreement by the seller
to repurchase them at the original purchase price plus accrued
interest, and may lend their portfolio securities.
5. Borrow money for any purpose other than redeeming its Shares or
purchasing its Shares for cancellation, and then only as a
temporary measure up to an amount not exceeding 5% of the value of
its total assets, except that Templeton Bond, Stock, Asset
Allocation and International Funds may borrow money in amounts up
to 30% of the value of its net assets.
6. Invest more than 25% of its total assets in a single industry,
except that this limitation will not apply to investments in
securities issued or guaranteed by the U.S. Government, its
agencies or instrumentalities, or repurchase agreements on such
securities, and Templeton Money Market Fund may invest in
obligations issued by domestic banks (including certificates of
deposit, repurchase agreements, and bankers' acceptances) without
regard to this limitation.
As non-fundamental investment policies, which may be changed by the
Board of Trustees without Shareholder approval, a Fund will not invest more
than 15% of its total assets in securities of foreign issuers which are not
listed on a recognized United States or foreign securities exchange, or more
than 10% of its total assets in (a) securities with a limited trading market,
(b) securities subject to legal or contractual restrictions as to resale, and
(c) repurchase agreements not terminable within seven days. In addition, as
non-fundamental investment policies, Templeton Stock, Asset Allocation and
International Funds will not invest more than 5% of each Fund's assets in debt
securities rated lower than Baa by Moody's Investors Service, Inc. or BBB by
Standard & Poor's Corporation.
Whenever any investment policy or investment restriction states a
maximum percentage of a Fund's assets which may be invested in any security or
other property, it is intended that such maximum percentage limitation be
determined immediately after and as a result of the Fund's acquisition of such
security or property. The investment restrictions do not preclude a Fund from
purchasing the securities of any issuer pursuant to the exercise of
subscription rights distributed to a Fund by the issuer, unless such purchase
would result in a violation of investment restriction number 6, or the non-
fundamental investment policies discussed above.
TRADING POLICIES
The Investment Managers and their affiliated companies serve as
investment manager to other investment companies and private clients.
Accordingly, the respective portfolios of these funds and clients may contain
many or some of the same securities. When any two or more of these funds or
clients are engaged simultaneously in the purchase or sale of the same
security, the transactions are placed for execution in a manner designed to be
equitable to each party. The larger size of the transaction may affect the
price of the security and/or the quantity which may be bought or sold for each
party. If the transaction is large enough, brokerage commissions may be
negotiated below those otherwise chargeable.
Sale or purchase of securities, without payment of brokerage
commissions, fees (except customary transfer fees) or other remuneration in
connection therewith, may be effected between any of these funds, or between
funds and private clients, under procedures adopted pursuant to Rule 17a-7
under the 1940 Act.
PERSONAL SECURITIES TRANSACTIONS. Access persons of the Franklin
Templeton Group, as defined in the SEC Rule 17(j) under the 1940 Act, who are
employees of Franklin Resources, Inc. or their subsidiaries, are permitted to
engage in personal securities transactions subject to the following general
restrictions and procedures: (1) The trade must receive advance clearance from
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a Compliance Officer and must be completed within 24 hours after this
clearance; (2) Copies of all brokerage confirmations must be sent to the
Compliance Officer and within 10 days after the end of each calendar quarter,
a report of all securities transactions must be provided to the Compliance
Officer; (3) In addition to items (1) and (2), access persons involved in
preparing and making investment decisions must file annual reports of their
securities holdings each January and also inform the Compliance Officer (or
other designated personnel) if they own a security that is being considered
for a fund or other client transaction or if they are recommending a security
in which they have an ownership interest for purchase or sale by a fund or
other client.
MANAGEMENT OF THE TRUST
The name, address, principal occupation during the past five years and
other information with respect to each of the Trustees and Principal Executive
Officers of the Trust are as follows:
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NAME, ADDRESS AND PRINCIPAL OCCUPATION
OFFICES WITH TRUST DURING PAST FIVE YEARS
<S> <C>
CHARLES E. JOHNSON* Senior vice president and director,
777 Mariners Island Blvd. Franklin Resources, Inc.; senior
San Mateo, California vice president, Franklin Templeton
Trustee and President Distributors, Inc.; president and
director, Franklin Institutional Service
Corporation and Templeton Worldwide, Inc.;
chairman of the board of Templeton
Investment Counsel, Inc.; vice president
and/or director, as the case may be, for
some of the subsidiaries of Franklin
Resources, Inc.; and officer and/or
director or trustee, as the case may be,
of 24 of the investment companies in the
Franklin Templeton Group of Funds.
HARRIS J. ASHTON Chairman of the board, president, and
Metro Center, 1 Station Place chief executive officer of General Host
Stamford, Connecticut Corporation (nursery and craft centers);
Trustee director of RBC Holdings Inc. (a bank
holding company) and Bar-S Foods.
S. JOSEPH FORTUNATO Member of the law firm of Pitney,
200 Campus Drive Hardin, Kipp & Szuch; director of
Florham Park, New Jersey General Host Corporation.
Trustee
HASSO-G VON DIERGARDT-NAGLO Farmer; president of Clairhaven
R.R. 3 Investments, Ltd. and other private
Stouffville, Ontario investment companies.
Trustee
F. BRUCE CLARKE Retired; former credit adviser for
19 Vista View Blvd. National Bank of Canada, Toronto.
Thornhill, Ontario
Trustee
BETTY P. KRAHMER A director or trustee of various
2201 Kentmere Parkway civic associations; former economic
Wilmington, Delaware analyst, U.S. Government.
Trustee
FRED R. MILLSAPS Manager of personal investments (1978-
2665 NE 37th Drive present); chairman and chief executive
Fort Lauderdale, Florida officer of Landmark Banking Corporation
Trustee (1969-1978); financial vice president of Florida
Power and Light (1965-1969); vice president of
Federal Reserve Bank of Atlanta (1958-1965);
director of various business and nonprofit
organizations.
JOHN G. BENNETT, JR. Founder, chairman of the board
3 Radnor Corporate Center and president of New Era
Suite 150 Philanthropy, Inc.; chairman of
100 Matsonford Rd. Human Service Systems,
Radnor, Pennsylvania Inc.; president of The Foundation
Trustee for New Era Philanthropy; a director or trustee
of many national and international
organizations, including universities and grant-
making foundations; member of the Public Policy
Committee of the Advertising Council.
ANDREW H. HINES, JR. Consultant, Triangle Consulting
150 2nd Avenue N. Group; chairman of the board and chief
St. Petersburg, Florida executive officer of Florida Progress
Trustee Corporation (1982-February, 1990) and director
of various of its subsidiaries; chairman and
director of Precise Power Corporation;
Executive-in-Residence of Eckerd College (1991-
present); director of Checkers Drive-In
Restaurants, Inc.
GORDON S. MACKLIN Chairman of White River Corporation
8212 Burning Tree Road (information services); director of
Bethesda, Maryland 20817 Fund America Enterprises Holdings
Trustee Inc., Lockheed Martin Marietta Corporation, MCI
Communications Corporation and Medimmune, Inc.;
formerly, chairman, Hambrecht and Quist Group,
director, H&Q Healthcare Investors, and
president, National Association of Securities
Dealers, Inc.
NICHOLAS F. BRADY* Chairman and president of Darby
102 East Dover Street Overseas Investments, Ltd. (an
Easton, Maryland investment firm) since 1994; director of
Trustee the H. J. Heinz Company, Amerada Hess
Corporation, Capital Cities/ABC, Inc. and the
Christiana Companies; Secretary of the United
States Department of the Treasury from 1988 to
January, 1993; chairman of the board of Dillon,
Read & Co. Inc. (investment banking) prior
thereto.
CHARLES B. JOHNSON President, chief executive officer,
777 Mariners Island Blvd. and director of Franklin Resources,
San Mateo, California Inc.;chairman of the board and
Vice President director Franklin Advisers, Inc.and Franklin
Templeton Distributors, Inc.; director, Franklin
Administrative Services, Inc., General Host
Corporation and Templeton Global Investors,
Inc.; director or trustee of other Templeton
Funds; and officer and director, trustee, or
managing general partner, as the case may be, of
most other subsidiaries of Franklin Resources,
Inc. and of most of the investment companies in
the Franklin Group of Funds.
MARK G. HOLOWESKO President, chief executive officer and
Lyford Cay director of Templeton, Galbraith & Hansberger
Nassau, Bahamas Ltd. ("TGH"); director of global equity research
Vice President for TGH; president or vice president of the
Templeton Funds; investment administrator with
Roy West Trust Corporation (Bahamas) Limited
(1984-1985).
MARTIN L. FLANAGAN Senior vice president, treasurer, and
777 Mariners Island Blvd. chief financial officer of Franklin
San Mateo, California Resources, Inc.; executive vice president,
Vice President chief executive officer and director of
Templeton Investment Counsel, Inc. and director,
president and chief executive officer of
Templeton Global Investors, Inc.; director or
trustee and president or vice president of the
Templeton Funds; accountant, Arthur Andersen &
Company (1982-1983); member of the International
Society of Financial Analysts and the American
Institute of Certified Public Accountants.
SAMUEL J. FORESTER, JR. President of the Templeton Global Bond
500 East Broward Blvd. Managers Division of Templeton Investment
Fort Lauderdale, Florida Counsel, Inc.; president or vice president
Vice President of other Templeton Funds; founder and partner of
Forester, Hairston Investment Management (1989-
1990); managing director (Mid-East Region) of
Merrill Lynch, Pierce, Fenner & Smith Inc.
(1987-1988); advisor for Saudi Arabian Monetary
Agency (1982-1987).
DANIEL L. JACOBS Executive vice president and
500 East Broward Blvd. director of Templeton Investment Counsel,
Fort Lauderdale, Florida Inc.; director of Templeton Global
Vice President Investors, Inc.; president or vice president of
certain of the Templeton Funds.
JOHN R. KAY Vice president of the Templeton
500 East Broward Blvd. Funds; vice president and treasurer of
Fort Lauderdale, Florida Templeton Global Investors, Inc. and
Vice President Templeton Worldwide, Inc.; formerly, vice
president and controller of the Keystone Group,
Inc.
THOMAS J. LATTA Vice president of the Templeton Global
500 East Broward Blvd. Investment Counsel, Inc.; vice president
Fort Lauderdale, Florida of certain of the Templeton Funds;
Vice President formerly, portfolio manager, Forester & Hairston
(1988-1991); investment adviser, Merrill Lynch,
Pierce, Fenner & Smith Incorporated (1981-1988).
THOMAS M. MISTELE Senior vice president of Templeton
700 Central Avenue Global Investors, Inc.; vice president
St. Petersburg, Florida of Franklin Templeton Distributors, Inc.;
Secretary secretary of the Templeton Funds; attorney,
Dechert Price & Rhoads (1985-1988) and Freehill,
Hollingdale & Page (1988); judicial clerk, U.S.
District Court (Eastern District of Virginia)
(1984-1985).
JAMES R. BAIO Certified public accountant; treasurer
500 East Broward Blvd. of the Templeton Funds; senior vice
Fort Lauderdale, Florida president of Templeton Worldwide, Inc.,
Treasurer Templeton Global Investors, Inc., and Templeton
Funds Trust Company; formerly, senior tax
manager of Ernst & Young (certified public
accountants)(1977-1989).
JACK L. COLLINS Assistant treasurer of the Templeton
700 Central Avenue Funds; assistant vice president of
St. Petersburg, Florida Franklin Templeton Investor Services,
Assistant Treasurer Inc.; former partner of Grant Thornton,
independent public accountants.
JEFFREY L. STEELE Partner, Dechert Price & Rhoads.
1500 K Street, N.W.
Washington, D.C.
Assistant Secretary
</TABLE>
- ---------------
* Messrs. Johnson and Brady are Directors who are "interested persons" of the
Fund as that term is defined in the 1940 Act. Mr. Brady and Franklin
Resources, Inc. are limited partners of Darby Overseas Partners, L.P. ("Darby
Overseas"). Mr. Brady established Darby Overseas in February, 1994, and is
Chairman and a shareholder of the corporate general partner of Darby Overseas.
In addition, Darby Overseas and Templeton, Galbraith & Hansberger, Ltd. are
limited partners of Darby Emerging Markets Fund, L.P.
<PAGE>
TRUSTEE COMPENSATION
All of the Trust's officers and Trustees also hold positions with other
investment companies in the Franklin Templeton Group. No compensation is paid
by the Trust to any officer or trustee who is an officer, trustee or employee
of the Investment Managers or their affiliates. Each Templeton Fund pays its
independent directors and trustees and Mr. Brady an annual retainer and/or
fees for attendance at Board and Committee meetings, the amount of which is
based on the level of assets in each fund. Accordingly, based upon the assets
of the Trust as of December 31, 1994, the Trust will pay the independent
Trustees and Mr. Brady an annual retainer of $4000.00 and a fee of $350.00 per
meeting attended of the Board and its Committees. The independent Trustees
and Mr. Brady are reimbursed for any expenses incurred in attending meetings,
paid pro rata by each Franklin Templeton fund in which they serve. No pension
or retirement benefits are accrued as part of Trust expenses.
The following table shows the total compensation paid to the Trustees by
the Trust and by all investment companies in the Franklin Templeton Group for
the fiscal year ended December 31, 1994:
<TABLE>
<CAPTION>
NUMBER OF TOTAL COMPENSATION
NAME AGGREGATE FRANKLIN TEMPLETON FROM ALL FUNDS IN
OF COMPENSATION FUND BOARDS ON WHICH FRANKLIN TEMPLETON
DIRECTOR FROM THE TRUST TRUSTEE SERVES GROUP
<S> <C> <C> <C>
Harris J. Ashton $2,850 54 $319,925
John G. Bennett 3,350 23 105,625
Nicholas F. Brady 2,850 23 86,125
F. Bruce Clarke 3,350 19 95,275
S. Joseph Fortunato 2,850 56 336,065
Andrew H. Hines, Jr. 3,350 23 106,125
Betty P. Krahmer 2,850 19 75,275
Gordon S. Macklin 2,850 51 303,695
Fred R. Millsaps 3,350 23 106,125
Hasso-G von
Diergardt-Naglo 2,850 19 75,275
</TABLE>
<PAGE>
PRINCIPAL SHAREHOLDERS
Shares of the Fund are sold to and owned only by insurance company
separate accounts to serve as the investment vehicle for variable annuity
contracts. As of March 24, 1995, there were 22,838,642 Shares of Templeton
Money Market Fund outstanding, of which no Shares were owned by the Trustees
and officers of the Trust; 2,856,232 Shares of Templeton Bond Fund outstand-
ing, of which no Shares were owned by the Trustees and officers of the Trust;
23,454,897 Shares of Templeton Stock Fund outstanding, of which no Shares
were owned, by the Trustees and officers of the Trust; 19,835,756 Shares of
Templeton Asset Allocation Fund outstanding, of which no Shares were owned by
the Trustees and officers of the Trust; and 14,780,740 Shares of Templeton
International Fund outstanding, of which no Shares were owned by the Trustees
and officers of the Trust. As of March 24, 1995, Phoenix Home Mutual Life
Insurance Company ("Phoenix Home Life") owned 100% of the outstanding Shares
of Templeton Money Market Fund, 62% of the outstanding Shares of Templeton
Bond Fund, 63% of the outstanding Shares of Templeton Stock Fund, 40% of the
outstanding Shares of Templeton Asset Allocation Fund, and 40% of the out-
standing Shares of Templeton International Fund, including Shares received in
return for monies paid in connection with the initial capital advances made
to the Trust. As of March 24, 1995, The Travelers Insurance Company ("The
Travelers") owned 38% of the outstanding Shares of Templeton Bond Fund, 37% of
the outstanding Shares of Templeton Stock Fund, and 44% of the outstanding
Shares of Templeton Asset Allocation Fund. As of March 24, 1995, the
Variable Annuity Life Insurance Company ("VALIC") owned 16% of the outstand-
ing shares of Templeton Asset Allocation Fund and 59% of Templeton Interna-
tional Fund. However, Phoenix Home Life, The Travelers and VALIC will exercise
voting rights attributable to these Shares in accordance with voting
instructions received by owners of the contracts issued by Phoenix Home Life,
The Travelers, and VALIC. To this extent, Phoenix Home Life, The Travelers
and VALIC do not exercise control over the Trust by virtue of the voting
rights from their ownership of Trust Shares. To the knowledge of management,
as of March 24, 1995, no other person owned of record or beneficially 5% or
more of the Shares of any of the Funds.
INVESTMENT MANAGEMENT AND OTHER SERVICES
INVESTMENT MANAGEMENT AGREEMENTS. The Investment Manager of Templeton
Money Market Fund and Templeton Bond Fund is the Templeton Global Bond Man-
agers division ("TGBM") of Templeton Investment Counsel, Inc., a Florida
corporation with offices in Fort Lauderdale, Florida. The Investment Manager
of Templeton Asset Allocation Fund, Templeton Stock Fund, and Templeton Inter-
national Fund is Templeton Investment Counsel, Inc. ("TICI"). The Investment
Management Agreements between the Investment Managers and the Trust on behalf
of the Funds (the "Management Agreements"), dated October 30, 1992, and
amended and restated on February 25, 1994, were approved by the Shareholders
of the Funds on October 30, 1992, and were last approved by the Board of
Trustees, including a majority of the Trustees who were not parties to the
Agreements or interested persons of any such party, at a meeting held on
February 24, 1995, and will continue through April 30, 1996. The Management
Agreements will continue from year to year thereafter subject to approval
annually by the Board of Trustees or by vote of a majority of the outstanding
Shares of each Fund (as defined in the 1940 Act) and also, in either event,
the approval of a majority of those Trustees who are not parties to the
Management Agreements or interested persons of any such party in person at a
meeting called for the purpose of voting on such approval.
The Investment Management Agreements require the Investment Managers
to manage the investment and reinvestment of each Fund's assets. The Invest-
ment Managers are not required to furnish any personnel, overhead items or
facilities for the Funds, including daily pricing or trading desk facilities,
although such expenses are paid by investment advisers of some other invest-
ment companies.
The Management Agreements provide that the Investment Managers will
select brokers and dealers for execution of each Fund's portfolio
transactions consistent with the Fund's brokerage policies (see "Brokerage
Allocation"). Although the services provided by broker-dealers in accordance
with the brokerage policies incidentally may help reduce the expenses of or
otherwise benefit the Investment Managers and other investment management
clients of the Investment Managers and of their affiliates, as well as the
Funds, the value of such services is indeterminable and the Investment
Managers' fee is not reduced by any offset arrangement by reason thereof.
Under the Management Agreements, the Investment Manager is permitted
to provide investment advisory services to other clients, including clients
which may invest in the same types of securities as the Funds and, in provid-
ing such services, the Investment Managers may use information furnished by
others. Conversely, information furnished by others to the Investment
Managers in providing services to other clients may be useful to the Invest-
ment Managers in providing services to the Funds. When an Investment Manager
determines to buy or sell the same security for a Fund that the Investment
Manager or one or more of its affiliates has selected for one or more of its
other clients or for clients of its affiliates, the orders for all such
securities transactions are placed for execution by methods determined by the
Investment Manager, with approval by the Board of Trustees, to be impartial
and fair, in order to seek good results for all parties. Records of securit-
ies transactions of persons who know when orders are placed by a Fund are
available for inspection at least four times annually by the compliance
officer of the Trust so that the non-interested Trustees (as defined in the
1940 Act) can be satisfied that the procedures are generally fair and
equitable to all parties.
The Management Agreements provide that the Investment Managers shall
have no liability to the Trust, a Fund or any Shareholder of a Fund for any
error of judgment, mistake of law, or any loss arising out of any investment
or other act or omission in the performance by the Investment Manager of its
duties under the Management Agreement, or for any loss or damage resulting from
the imposition by any government of exchange control restrictions which might
affect the liquidity of a Fund's assets, or from acts or omissions of custo-
dians or securities depositories, or from any wars or political acts of any
foreign governments to which such assets might be exposed, except any
liability resulting from willful misfeasance, bad faith or gross negligence
on the Investment Manager's part, or reckless disregard of its duties under
the Management Agreement. The Management Agreements will terminate auto-
matically in the event of their assignment, and may be terminated by the
Trust on behalf of a Fund at any time without payment of any penalty on 60
days' written notice, with the approval of a majority of the Trustees in
office at the time or by vote of a majority of the outstanding voting
securities of that Fund (as defined by the 1940 Act).
<PAGE>
MANAGEMENT FEES. For its services, Templeton Money Market Fund pays
its Investment Manager a monthly fee equal on an annual basis to 0.35% of its
average daily net assets up to $200 million, reduced to 0.30% of such net
assets from $200 million up to $1,300 million and further reduced to 0.25% of
such net assets in excess of $1,300 million. Templeton Bond, Stock, Asset
Allocation and International Funds each pay their Investment Manager a
monthly fee equal on an annual basis to 0.50% of its average daily net assets
up to $200 million, reduced to 0.45% of such net assets from $200 million up
to $1,300 million and further reduced to 0.40% of such net assets in excess
of $1,300 million. During the fiscal year ended December 31, 1994, Templeton
Money Market Fund, Templeton Bond Fund, Templeton Stock Fund, Templeton Asset
Allocation Fund, and Templeton International Fund paid investment management
fees of $88,106, $149,843, $1,686,602, $1,186,540, and $404,532,
respectively. During the fiscal year ended December 31, 1993, Templeton
Money Market Fund, Templeton Bond Fund, Templeton Stock Fund, Templeton Asset
Allocation Fund, and Templeton International Fund paid investment management
fees of $55,445, $111,575, $1,089,643, $608,471, and $95,518, respectively.
During the fiscal year ended December 31, 1992, Templeton Money Market Fund,
Templeton Bond Fund, Templeton Stock Fund, Templeton Asset Allocation Fund,
and Templeton International Fund paid investment management fees of $77,049,
$55,211, $702,809, $264,566, and $13,597, respectively.
THE INVESTMENT MANAGERS. The Investment Managers are indirect wholly
owned subsidiaries of Franklin, a publicly traded company whose shares are
listed on the New York Stock Exchange. Charles B. Johnson (a Trustee and Vice
President of the Trust), Rupert H. Johnson, Jr., and R. Martin Wiskemann are
principal shareholders of Franklin and own, respectively, approximately 20%,
16% and 9.2% of its outstanding shares. Messrs. Charles B. Johnson and
Rupert H. Johnson, Jr. are brothers.
BUSINESS MANAGER. Templeton Funds Annuity Company performs certain
administrative functions as Business Manager for the Trust, including:
o providing office space, telephone, office equipment and
supplies for the Trust;
o paying compensation of the Trust's officers for services
rendered as such;
o authorizing expenditures and approving bills for payment on
behalf of the Trust;
o supervising preparation of annual and semi-annual reports,
notices of dividends, capital gains distributions and tax
credits;
o daily pricing of the Funds' investment portfolios and
supervising publication of daily quotations of the bid and
asked prices of the Funds' Shares, earnings reports and other
financial data;
o providing trading desk facilities for the Funds;
o monitoring relationships with organizations serving the
Trust, including the Custodian and printers;
o supervising compliance by the Trust with recordkeeping
requirements under the 1940 Act and regulations thereunder,
with state regulatory requirements, maintaining books and
records for the Trust (other than those maintained by the
Custodian and Transfer Agent), and filing of tax reports on
behalf of the Trust other than the Trust's income tax
returns; and
o providing executive, clerical and secretarial help needed to
carry out these responsibilities.
For its services, the Business Manager receives a monthly fee equal
on an annual basis to 0.15% of the combined average daily net assets of the
Funds, reduced to 0.135% of the Funds' aggregate net assets in excess of $200
million, further reduced to 0.10% annually of such net assets in excess of
$700 million and further reduced to 0.075% annually of such net assets in
excess of $1,200 million. The fee is allocated among the Funds according to
their respective average daily net assets. Since the Business Manager's fee
covers services often provided by investment advisers to other funds, the
Funds' combined expenses for management and administrative services together
may be higher than those of some other investment companies. During the
fiscal years ended December 31, 1994, 1993, and 1992, the Business Manager
received fees of $1,006,867, $568,481 and $339,772, respectively.
The Business Manager is relieved of liability to the Trust for any
act or omission in the course of its performance under the Business Manage-
ment Agreement, in the absence of willful misfeasance, bad faith, gross neg-
ligence, or reckless disregard of its obligations and duties under the Agree-
ment. The Business Management Agreement may be terminated by a Fund at any time
on 60 days' written notice without payment of penalty,
<PAGE>
provided that such termination shall be directed or approved by vote of a
majority of the Trustees of the Trust in office at the time or by vote of a
majority of the outstanding voting securities of that Fund, and shall
terminate automatically and immediately in the event of its assignment.
Templeton Funds Annuity Company is an indirect wholly-owned
subsidiary of Franklin.
CUSTODIAN. The Chase Manhattan Bank, N.A. serves as Custodian of
the Trust's assets, which are maintained at the Custodian's principal office,
MetroTech Center, Brooklyn, New York, New York 11245 and at the offices of
its branches and agencies throughout the world. The Custodian has entered
into agreements with foreign sub-custodians approved by the Trustees
pursuant to Rule 17f-5 under the 1940 Act. The Custodian, its branches and
sub-custodians, generally domestically and frequently abroad, do not actually
hold certificates for the securities in their custody, but instead have book
records with domestic and foreign securities depositories, which in turn have
book records with the transfer agents of the issuers of the securities.
Compensation for the services of the Custodian is based on a schedule of charges
agreed on from time to time.
LEGAL COUNSEL. Dechert Price & Rhoads, 1500 K Street, N.W., Wash-
ington, D.C. 20005, is legal counsel for the Trust.
INDEPENDENT ACCOUNTANTS. McGladrey & Pullen LLP, 555 Fifth Avenue,
New York, New York 10017, serves as independent accountants for the Trust.
Its audit services comprise examination of the Trust's financial statements,
review of the Trust's filings with the Securities and Exchange Commission and
preparation of the Trust's federal and state corporation tax returns.
REPORTS TO SHAREHOLDERS. The Trust's fiscal year ends on December
31. Shareholders are provided at least semi-annually with reports showing
the Funds' portfolios and other information, including an annual report with
financial statements audited by independent accountants.
BROKERAGE ALLOCATION
The Management Agreements provide that the Investment Managers are
responsible for selecting members of securities exchanges, brokers and
dealers (such members, brokers and dealers being hereinafter referred to as
"brokers") for the execution of a Fund's portfolio transactions,and, when
applicable, the negotiation of commissions in connection therewith. All
recommendations, decisions and placements are made in accordance with the
following principles:
1. Purchase and sale orders are usually placed with brokers who are
selected by an Investment Manager as able to achieve "best execution"
of such orders. "Best execution" means prompt and reliable execution
at the most favorable securities price, taking into account the other
provisions hereinafter set forth. The determination of what may
constitute best execution and price in the execution of a securities
transaction by a broker involves a number of considerations, including,
without limitation, the overall direct net economic result to a Fund
(involving both price paid or received and any commissions and other
costs paid), the efficiency with which the transaction is effected,
the ability to effect the transaction at all where a large block is
involved, availability of the broker to stand ready to execute pos-
sibly difficult transactions in the future, and the financial
strength and stability of the broker. Such considerations are
judgmental and are weighed by an Investment Manager in determining the
overall reasonableness of brokerage commissions.
2. In selecting brokers for portfolio transactions, the Investment
Managers take into account its past experience as to brokers qual-
ified to achieve "best execution," including brokers who specialize
in any foreign securities held by a Fund.
3. The Investment Managers are authorized to allocate brokerage business
to brokers who have provided brokerage and research services, as such
services are defined in Section 28(e) of the Securities Exchange Act
of 1934 (the "1934 Act"), for a Fund and/or other accounts, if any,
for which an Investment Manager exercises investment discretion (as
defined in Section 3(a)(35) of the 1934 Act) and, as to transactions
as to which fixed minimum commission rates are not applicable, to
cause a Fund to pay a commission for effecting a securities trans-
action in excess of the amount another broker would have charged for
effecting that transaction, if an Investment Manager in making the
selection in question determines in good faith that such amount of
commission is reasonable in relation to the value of the brokerage and
research services provided by such broker, viewed in terms of either
that particular transaction or the Investment Manager's overall
responsibilities with respect to the Fund and the other accounts, if
any, as to which it exercises investment discretion. In reaching
such determination, an Investment Manager is not required to place or
to attempt to place a specific dollar value on the research or
<PAGE>
execution services of a broker or on the portion of any commission
reflecting either of said services. In demonstrating that such
determinations were made in good faith, the Investment Manager shall
be prepared to show that all commissions were allocated and paid for
purposes contemplated by the Trust's brokerage policy; that the
research services provide lawful and appropriate assistance to an
Investment Manager in the performance of its investment decision-
making responsibilities; and that the commissions paid were within a
reasonable range. The determination that commissions were within a
reasonable range shall be based on any available information as to
the level of commissions known to be charged by other brokers on
comparable transactions, but there shall be taken into account the
Trust's policies that (i) obtaining a low commission is deemed
secondary to obtaining a favorable securities price, since it is
recognized that usually it is more beneficial to a Fund to obtain a
favorable price than to pay the lowest commission and (ii) the
quality, comprehensiveness and frequency of research studies which
are provided for an Investment Manager are useful to the Investment
Manager in performing its management services under its Management
Agreement with the Trust. Research services provided by brokers to
an Investment Manager are considered to be in addition to, and not in
lieu of, services required to be performed by the Investment Manager
under its Management Agreement with the Trust. Research furnished by
brokers through whom a Fund effects securities transactions may be
used by an Investment Manager for any of its accounts, and not all such
research may be used by the Investment Manager for that Fund. When
execution of portfolio transactions is allocated to brokers trading
on exchanges with fixed brokerage commission rates, account may be
taken of various services provided by the broker, including quota-
tions outside the United States for daily pricing of foreign securit-
ies held in a Fund's portfolio.
4. Purchases and sales of portfolio securities within the United States
other than on a securities exchange are executed with primary market
makers acting as principal, except where, in the judgement of an
Investment Manager, better prices and execution may be obtained on a
commission basis or from other sources.
5. Sales of shares of investment companies registered under the 1940 Act
which have either the same investment adviser, or an investment adviser
affiliated with an Investment Manager, made by a broker is one factor
among others to be taken into account in deciding to allocate port-
folio transactions (including agency transactions, principal trans-
actions, purchases in underwritings or tenders in response to tender
offers) for the account of a Fund to that broker; provided that the
broker shall furnish "best execution," as defined in paragraph 1
above, and that such allocation shall be within the scope of the
Fund's other policies as stated above; and provided further, that in
every allocation made to a broker in which such sale of shares is
taken into account there shall be no increase in the amount of the
commissions or other compensation paid to such broker beyond a
reasonable commission or other compensation determined, as set forth
in paragraph 3 above, on the basis of best execution alone or best
execution plus research services, without taking account of or
placing any value upon such sale of shares.
Insofar as known to management, no Trustee or officer of the Trust,
nor the Investment Manager or Principal Underwriter or any person affiliated
with any of them, has any material direct or indirect interest in any broker
employed by or on behalf of the Trust. Franklin Templeton Distributors,
Inc., the Trust's Principal Underwriter, is a registered broker-dealer,
but it has never executed any purchase or sale transactions for the Funds'
portfolios or participated in any commissions on any such transactions, and
has no intention of doing so in the future. The total brokerage commissions
on the Trust's portfolio transactions during the fiscal years ended December
31, 1994, 1993, and 1992 were as follows: total commissions (not including
any spreads or concessions on principal transactions) of $672,000, $340,552
and $230,000, respectively. All portfolio transactions are allocated to
broker-dealers only when their prices and execution, in the good faith judg-
ment of management, are equal to the best available within the scope of the
Trust's policies. There is no fixed method used in determining which broker-
dealers receive which order or how many orders.
PORTFOLIO TURNOVER. For reporting purposes, each Fund's portfolio
turnover rate is calculated by dividing the value of the lesser of purchases
or sales of portfolio securities for the fiscal year by the monthly average
of the value of the portfolio securities owned by the Fund during the fiscal
year. In determining such portfolio turnover, short-term U.S. Government
securities and all other securities whose maturities at the time of
acquisition were one year or less are excluded. A 100% portfolio turnover
rate would occur, for example, if all of the securities in the portfolio
(other than short-term securities) were replaced once during the fiscal year.
The portfolio turnover rate for each of the Funds will vary from year to year,
depending on market conditions.
<PAGE>
It is anticipated that the rate of portfolio turnover as defined
above for Templeton Stock, Asset Allocation and International Funds will be
less than 50%, and for Templeton Bond Fund, less than 100%, under normal
market conditions. Portfolio turnover could be greater in periods of unusual
market movement and volatility. Templeton Bond Fund's portfolio turnover
rates for the fiscal years ended December 31, 1994, 1993, and 1992 were
203.91%, 170.3% and 148.7%, respectively. The increase in the Fund's
portfolio turnover rate was the result of trading by the Investment Manager
to improve the Fund's yield in response to rising interest rates and to hedge
currency exposure. In light of rising interest rates, the Investment Manager
determined to increase the Fund's positions in bonds with shorter maturities,
which resulted in the higher portfolio turnover rate.
PURCHASE AND REDEMPTION OF SHARES; NET ASSET VALUE
The Prospectus describes the manner in which a Fund's Shares may be
purchased and redeemed. See "How to Buy Shares of the Funds" and "How to
Sell Shares of the Funds."
Net asset value per Share is calculated separately for each Fund.
Net asset value per Share is determined as of the scheduled closing time of
the New York Stock Exchange( generally 4:00 p.m., New York time) every Monday
hrough Friday (exclusive of national business holidays). The Trust's offices
will be closed, and net asset value will not be calculated, on those days on
which the New York Stock Exchange is closed, which currently are: New Year's
Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.
Templeton Money Market Fund uses the amortized cost method to
determine the value of its portfolio securities pursuant to Rule 2a-7 under
the 1940 Act. The amortized cost method involves valuing a security at its
cost and amortizing any discount or premium over the period until maturity,
regardless of the impact of fluctuating interest rates on the market value of
the security. While this method provides certainty in valuation, it may
result in periods during which the value, as determined by amortized cost,
is higher or lower than the price which Templeton Money Market Fund would
receive if the security were sold. During these periods the yield to a
shareholder may differ somewhat from that which could be obtained from a
similar fund which utilizes a method of valuation based upon market prices.
Thus, during periods of declining interest rates, if the use of the amortized
cost method resulted in a lower value of the Fund's portfolio on a particular
day, a prospective investor in the Fund would be able to obtain a somewhat
higher yield than would result from investment in a fund utilizing solely
market values, and existing Shareholders would receive corresponding less
income. The converse would apply during periods of rising interest rates.
In accordance with Rule 2a-7, the Fund is required to (i) maintain a
dollar-weighted average portfolio maturity of 90 days or less; (ii) purchase
only instruments having remaining maturities of 397 days or less; and (iii)
invest only in U.S. dollar denominated securities determined in accordance
with procedures established by the Board of Trustees to present minimal
credit risks and which are rated in one of the two highest rating categories
for debt obligations by at least two nationally recognized statistical rating
organizations (or one rating organization if the instrument was rated by only
one such organization, subject to ratification of the investment by the Board
of Trustees). If a security is unrated, it must be of comparable quality as
determined in accordance with procedures established by the Board of Trustees,
including approval or ratification of the security by the Board except in the
case of U.S. Government securities. Pursuant to the Rule, the Board is re-
quired to establish procedures designed to stabilize, to the extent reason-
ably possible, the Fund's price per Share as computed for the purpose of
sales and redemptions at $1.00. Such procedures will include review of the
Fund's portfolio holdings by the Board of Trustees, at such intervals as it
may deem appropriate, to determine whether the Fund's net asset value cal-
culated by using available market quotations deviates from $1.00 per Share
based on amortized cost. The extent of any deviation will be examined by the
Board of Trustees. If such deviation exceeds 1/2 of 1%, the Board will promptly
consider what action, if any, will be initiated. In the event the Board deter-
mines that a deviation exists which may result in material dilution or other
unfair results to investors or existing Shareholders, the Board will take
such corrective action as it regards as necessary and appropriate, including
the sale of portfolio instruments prior to maturity to realize capital gains or
losses or to shorten average portfolio maturity, withholding dividends or
establishing a net asset value per Share by using available market quotations.
The Board of Trustees may establish procedures under which a Fund
may suspend the determination of net asset value for the whole or any part of
any period during which (1) the New York Stock Exchange is closed other than
for customary weekend and holiday closings, (2) trading on the New York Stock
Exchange is restricted, (3) an emergency exists, as determined by the
Securities and Exchange Commission, as a result of which disposal of
securities owned by the Fund is not reasonably practicable or it is not
reasonably practicable for the Fund fairly to determine the value of its net
assets, or (4) for such other period as the Securities and Exchange Commission
may by order permit for the protection of the holders of a Fund's Shares.
<PAGE>
TAX STATUS
Templeton Money Market Fund intends to declare dividends daily and
to pay dividends monthly. Templeton Stock, Bond, Asset Allocation and
International Funds normally intend to pay an annual dividend representing
substantially all of their net investment income and to distribute annually
any net realized capital gains. By so doing and meeting certain diversifica-
tion of assets and other requirements of the Internal Revenue Code of 1986,
as amended (the "Code"), and as described in the Prospectus, each Fund
intends to qualify as a regulated investment company under the Code. The
status of the Funds as regulated investment companies does not involve
government supervision or management of their investment practices or
policies. As a regulated investment company, each Fund will be relieved of
liability for United States federal income tax on that portion of its net
investment income and net realized capital gains which it distributes to its
Separate Account Shareholders.
Amounts not distributed on a timely basis in accordance with a
calendar year distribution requirement are also subject to a nondeductible 4%
excise tax unless the exception described below applies. To avoid the tax if
it otherwise applies, a Fund must distribute during each calendar year, (i)
at least 98% of its ordinary income (not taking into account any capital gains
or losses) for the calendar year, (ii) at least 98% of its capital gains in
excess of its capital losses for the twelve-month period ending on October 31
of the calendar year (adjusted for certain ordinary losses), and (iii) all
ordinary income and capital gains for previous years that were not distrib-
uted during such years. To avoid application of the excise tax, each Fund
intends to make its distributions in accordance with the calendar year
distribution requirement. A distribution will be treated as paid on December
31 of the calendar if it is declared by a Fund during October, November, or
December of that year to Shareholders of record on a date in such a month and
paid by the Fund during January of the following calendar year. Such
distributions will be taxable to Shareholders (a Separate Account) in the
calendar year in which the distributions are declared, rather than the cal-
endar year in which the distributions are received. The excise tax provi-
sions described above will not apply in a given calendar year to a
Fund if all of its shareholders at all times during the calendar year are
segregated asset accounts of life insurance companies where the shares are
held in connection with variable contracts. (For this purpose, any shares of
a regulated investment company attributable to an investment not exceeding
$250,000 made in connection with the organization of the company is not
taken into account.) Accordingly, if this condition regarding the ownership
of Shares of each of the Funds is met, the excise tax will be inapplicable to
that Fund even if the calendar year distribution requirement is not met.
The Funds may invest in shares of foreign corporations which may be
classified under the Code as passive foreign investment companies (PFICs").
In general, a foreign corporation is classified as a PFIC if at least one-
half of its assets constitute investment-type assets or 75% or more of its
gross income is investment-type income. If a Fund receives a so-called "excess
distribution" with respect to PFIC stock, the Fund itself may be subject to
tax on a portion of the excess distribution, whether or not the corresponding
income is distributed by the Fund to Shareholders. In general, under the
PFIC rules, an excess distribution is treated as having been realized ratably
over the period during which a Fund held the PFIC shares. A Fund itself will
be subject to tax on the portion, if any, of an excess distribution that is
so allocated to prior Fund taxable years and an interest factor will be added
to the tax, as if the tax had been payable in such prior taxable years.
Certain distributions from a PFIC as well as gain from the sale of PFIC
shares are treated as excess distributions. Excess distributions are
characterized as ordinary income even though, absent application of the PFIC
rules, certain excess distributions might have been classified as capital gain.
The Funds may be eligible to elect alternative tax treatment with
respect to PFIC shares. Under an election that currently is available in
some circumstances, a Fund generally would be required to include in its
gross income its share of the earnings of a PFIC on a current basis,
regardless of whether distributions are received from the PFIC in a given
year. If this election were made, the special rules, discussed above,
relating to the taxation of excess distributions, would not apply. In
addition, another election may be available that would involve marking to
market the Fund's PFIC shares at the end of each taxable year (and on certain
other dates prescribed in the Code), with the result that unrealized gains
are treated as though they were realized. If this election were made, tax at
the Fund level under the PFIC rules would generally be eliminated, but the
Fund could, in limited circumstances, incur nondeductible interest charges.
The Fund's intention to qualify annually as a regulated investment company
may limit its elections with respect to PFIC shares.
Because the application of the PFIC rules may affect, among other
things, the character of gains, the amount of gain or loss and the timing of
the recognition of income with respect to PFIC shares, as well as subject a
Fund itself to tax on certain income from PFIC shares, the amount that must
be distributed to Shareholders, and which will be taxed to Shareholders as
ordinary income or long-term capital gain, may be increased or decreased
substantially as compared to a fund that did not invest in PFIC shares.
Income received by a Fund from sources within a foreign country may be
subject to withholding taxes and other taxes imposed by that country. Tax
conventions between certain countries and the U.S. may reduce or eliminate
such taxes.
<PAGE>
Under the Code, gains or losses attributable to fluctuations in
exchange rates which occur between the time a Fund accrues income or other
receivables or accrues expenses or other liabilities denominated in a foreign
currency and the time that Fund actually collects such receivables or pays
such liabilities generally are treated as ordinary income or ordinary loss.
Similarly, on disposition of debt securities denominated in a foreign cur-
rency and on disposition of certain futures contracts and forward contracts,
gains or losses attributable to fluctuations in the value of foreign currency
between the date of acquisition of the security or contract and the date of
disposition also are treated as ordinary gain or loss. These gains or losses,
referred to under the Code as "Section 988" gains or losses, may increase or
decrease the amount of a Fund's net investment income to be distributed to
its Shareholders as ordinary income.
Debt securities purchased by a Fund may be treated for federal
income tax purposes as having original issue discount. Original issue
discount essentially represents interest for federal income tax purposes and
can be defined generally as the excess of the stated redemption price at
maturity over the issue price. Original issue discount, whether or not any
income is actually received by a Fund, is treated for U.S. federal income tax
purposes as ordinary income earned by the Fund, and therefore is subject to
the distribution requirements of the Code. Generally, the amount of original
issue discount included in the income of a Fund each year is determined on
the basis of a constant yield to maturity which takes into account the com-
pounding of accrued but unpaid interest.
Some of the debt securities may be purchased by the Fund at a discount
which exceeds the original issue discount on such debt securities, if any.
This additional discount represents market discount for Federal income tax
purposes. The gain realized on the disposition of any taxable debt security
having market discount will be treated as ordinary income to the extent it
does not exceed the accrued market discount on such debt security. Gen-
erally, market discount accrues on a daily basis for each day the debt
security is held by the Fund at a constant rate over the time remaining to
the debt security's maturity or, at the election of the Fund, at a constant
yield to maturity which takes into account the semi-annual compounding of
interest.
Certain options, futures contracts and forward contracts in which the
Templeton Stock, Bond, Asset Allocation and International Funds may invest
are "section 1256 contracts." Gains or losses on section 1256 contracts
generally are considered 60% long-term and 40% short-term capital gains or
losses ("60-40"), except for certain foreign currency gains and losses which
will be treated as ordinary in character. Also, section 1256 contracts held
by a Fund at the end of each taxable year (and, in some cases, for purposes
of the 4% excise tax, on October 31 of each year) are "marked-to-market" with
the result that unrealized gains or losses are treated as though they were
realized.
The hedging transactions undertaken by certain of the Funds may result
in "straddles" for federal income tax purposes. The straddle rules may
affect the character of gains (or losses) realized by a Fund. In addition,
losses realized by a Fund on positions that are part of a straddle may be
deferred under the straddle rules, rather than being taken into account in
calculating the taxable income for the taxable year in which such losses are
realized. Because only a few regulations implementing the straddle rules
have been promulgated, the tax consequences to the Funds of hedging trans-
actions are not entirely clear. The hedging transactions may increase the
amount of short-term capital gain realized by the Funds which is taxed as
ordinary income when distributed to Shareholders.
Each Fund may make one or more of the elections available under the Code
which are applicable to straddles. If the Fund makes any of the elections,
the amount, character and timing of the recognition of gains or losses from
the affected straddle positions will be determined under rules that vary
according to the elections made. The rules applicable under certain of the
elections may operate to accelerate the recognition of gains or losses from the
affected straddle positions.
Because application of the straddle rules may affect the character of
gains or losses, defer losses and/or accelerate the recognition of gains or
losses from the affected straddle positions, the amount which must be
distributed to shareholders, and which will be taxed to shareholders as
ordinary income or long-term capital gain, may be increased or decreased
substantially as compared to a fund that did not engage in such hedging
transactions.
The requirements under the Code relating to the qualification of a
Fund as a regulated investment company may limit the extent to which a Fund m
ay engage in futures and forward currency contracts.
Distributions of any net investment income and of any net realized
short term capital gains are treated as ordinary income for tax purposes in
the hands of the Separate Account Shareholder. The excess of any net long-
term capital gains over net short-term capital losses will, to the extent
distributed and designated by the distributing Fund as a capital gain
dividend, be treated as long-term capital gains in the hands of the
Shareholder regardless of the length of time a Separate Account may have held
the Shares.
Reference is made to the Prospectus for the applicable Contract for
information regarding the federal income tax treatment of distributions to
owners of contracts.
<PAGE>
DESCRIPTION OF SHARES
The Shares of each Fund have the same preferences, conversion and
other rights, voting powers, restrictions and limitations as to dividends,
qualifications, and terms and conditions of redemption, except as follows:
all consideration received from the sale of Shares of a Fund, together with
all income, earnings, profits and proceeds thereof, belongs to that Fund and
is charged with liabilities in respect to that Fund and of that Fund's part
of general liabilities of the Trust in the proportion that the total net
assets of the Fund bear to the total net assets of all Funds. The net asset
value of a Share of a Trust is based on the assets belonging to that Fund less
the liabilities charged to that Fund, and dividends are paid on Shares of a
Fund only out of lawfully available assets belonging to that Fund. In the
event of liquidation or dissolution of the Trust, the Shareholders of each
Fund will be entitled, out of assets of the Fund available for distributions,
to the assets belonging to that particular Fund.
Under Massachusetts law, shareholders could, under certain circum-
stances, be held personally liable for the obligations of the Trust. However,
the Declaration of Trust disclaims liability of the Shareholders, Trustees or
officers of the Trust for acts or obligations of the Trust, which, under the
terms of the Declaration of Trust, are binding only on the property of the
Trust, which, under the terms of the Declaration of Trust, are binding only
on the property of the Trust. The Declaration of the Trust provides for
indemnification out of Trust property for all loss and expense of any Share-
holder held personally liable for the obligations of the Trust. The risk of
a Shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which the Trust itself would be unable to meet
its obligations and, thus, should be considered remote.
YIELD AND PERFORMANCE INFORMATION
The Trust may, from time to time, include the yield and effective
yield of Templeton Money Market Fund or the total return of all Funds in
advertisements or reports to Shareholders or prospective investors. Per-
formance information for the Funds will not be advertised unless accompanied
by comparable performance information for a separate account to which the
Funds offer their Shares.
Current yield for Templeton Money Market Fund will be based on the
change in the value of a hypothetical investment (exclusive of capital
changes) over a particular seven-day period, less a pro-rata share of
Templeton Money Market Fund expenses accrued over that period (the "base
period"), and stated as a percentage of the investment at the start of the
base period (the "base period return"). The base period return is then
annualized by multiplying by 365/7, with the resulting yield figure carried
to at least the nearest hundredth of one percent. "Effective Yield" for
Templeton Money Market Fund assumes that all dividends received during an annual
period have been reinvested. Calculation of "effective yield" begins with
the same "base period return" used in the calculation of yield, which is then
annualized to reflect weekly compounding pursuant to the following formula:
EFFECTIVE YIELD = (1 + Base Period Return) 365/7 - 1
YIELD = 2[(1 + A-B)6 - 1]
cd
WHERE a = dividend and interest earned during the period,
b = expenses accrued for the period (net of reimbursements),
c = the average daily number of Shares outstanding during the
period that were entitled to receive dividends, and
d = the maximum offering price per Share on the last day of the
period.
For the seven-day period ending December 31, 1994, the 7-day
annualized yield of Money Market Fund was 4.96% and the effective yield of
Money Market Fund was 5.05%.
Quotations of average annual total return for the Funds will be
expresed in terms of the average annual compounded rate of return for periods
in excess of one year or the total return for periods less than one year of a
hypothetical investment in the Funds over periods of one, five, or ten years
(up to the life of a Fund) calculated pursuant to the following formula: P(1
+ T)n = ERV (where P = a hypothetical initial payment of $1,000, T = the
average annual total return for periods of one year or more or the total
return for periods of less than one year, n = the number of years, and ERV =
the ending redeemable value of a hypothetical $1,000 payment made at the begin-
ning of the period). All total return figures reflect the deduction of the
maximum initial sales charge and deduction of a proportional share of Fund
expenses on an annual basis, and assume that all dividends and distributions
are reinvested when paid. Templeton Money Market Fund's average annual
<PAGE>
total return for the one- and five-year periods ended December 31, 1994 and
from inception on August 31, 1988 through December 31, 1994, was 3.48%,
4.40%, and 5.05% respectively. Templeton Bond Fund's average annual total
return for the one- and five-year periods ended December 31, 1994 and from
inception on August 31, 1988 through December 31, 1994, was -4.88%, 6.63%,
and 6.73%, respectively. Templeton Stock Fund's average annual total return
for the one- and five-year periods ended December 31, 1994 and from inception
on August 31, 1988 through December 31, 1994, was -2.20%, 9.75%, and 10.40%,
respectively. Templeton Asset Allocation Fund's average annual total return
for the one- and five-year periods ended December 31, 1994 and from inception
on August 31, 1988 through December 31, 1994, was -2.96%, 9.22%, and 9.79%,
respectively. Templeton International Fund's average annual total return for
the one-year period ended December 31, 1994 and from inception on May 1, 1992
through December 31, 1994, was - 2.22% and 11.98%, respectively.
Performance information for a Fund may be compared, in reports and
promotional literature, to: (i) unmanaged indices so that investors may
compare the Fund's results with those of a group of unmanaged securities
widely regarded by investors as representative of the securities market in
general; (ii) other groups of mutual funds tracked by Lipper Analytical
Services, Inc., a widely used independent research firm which ranks mutual
funds by overall performance, investment objectives and assets, or tracked by
other services, companies, publications, or persons who rank mutual funds on
overall performance or other criteria; and (iii) the Consumer Price Index
(measure for inflation) to assess the real rate of return from an investment
in a Fund. Unmanaged indices may assume the reinvestment of dividends but
generally do not reflect deductions for administrative and management costs
and expenses.
Quotations of yield or total return for a Fund will not take into
account charges and deductions against any separate account to which the
Funds' Shares are sold or charges and deductions against variable insurance
contracts, although comparable performance information for a separate account
will take such charges into account. Performance information for a Fund
reflects only the performance of a hypothetical investment in a Fund during
the particular time period on which the calculations are based. Performance
information should be considered in light of a Fund's investment objective
and policies, characteristics and quality of the portfolio and the market
conditions during the given time period, and should not be considered as a
representation of what may be achieved in the future.
From time to time, each Fund and the Investment Managers may also
refer to the following information:
(1) The Investment Managers' and their affiliates' market share
of international equities managed in mutual funds prepared
or published by Strategic Insight or a similar statistical
organization.
(2) The performance of U.S. equity and debt markets relative to
foreign markets prepared or published by Morgan Stanley
Capital International or a similar financial organization.
(3) The capitalization of U.S. and foreign stock markets as
prepared or published by the International Finance Corp.,
Morgan Stanley Capital International or a similar
financial organization.
(4) The geographic distribution of the Fund's portfolio.
(5) The gross national product and populations, including age
characteristics, of various countries as published by
various statistical organizations.
(6) To assist investors in understanding the different returns
and risk characteristics of various investments, the Fund
may show historical returns of arious investments and pub-
lished indices (E.G., Ibbotson Associates, Inc. Charts
and Morgan Stanley EAFE - Index).
(7) The major industries located in various jurisdictions as
published by the Morgan Stanley Index.
(8) Rankings by DALBAR Surveys, Inc. with respect to mutual fund
shareholder services.
<PAGE>
(9) Allegorical stories illustrating the importance of persistent
long-term investing.
(10) The Fund's portfolio turnover rate and its ranking relative
to industry standards as published by Lipper Analytical
Services, Inc. or Morningstar, Inc.
(11) A description of the Templeton organization's investment
management philosophy and approach, including its worldwide
search for undervalued or "bargain" securities and its
diversification by industry, nation and type of stocks or other
securities.
(12) Quotations from the Templeton organization's founder, Sir
John Templeton <F1>, advocating the virtues of diversifica-
tion and long-term investing, including the following:
o "Never follow the crowd. Superior performance is
possible only if you
invest differently from the crowd."
o "Diversify by company, by industry and by country."
o "Always maintain a long-term perspective."
o "Invest for maximum total real return."
o "Invest - don't trade or speculate."
o "Remain flexible and open-minded about types of
investment."
o "Buy low."
o "When buying stocks, search for bargains among
quality stocks."
o "Buy value, not market trends or the economic outlook."
o "Diversify. In stocks and bonds, as in much else,
there is safety in numbers."
o "Do your homework or hire wise experts to help you."
o "Aggressively monitor your investments."
o "Don't panic."
o "Learn from your mistakes."
o "Outperforming the market is a difficult task."
o "An investor who has all the answers doesn't even
understand all the questions."
o "There's no free lunch."
o "And now the last principle: Do not be fearful or
negative too often."
- -----------------
<F1> Sir John Templeton sold the Templeton organization to Franklin
Resources, Inc, in October, 1992 and resigned from the Fund's Board on April
16, 1995. He is no longer involved with the investment management process.
In addition, each Fund and the Investment Managers may also refer to
the number of shareholders in the Fund or the aggregate number of share-
holders in the Franklin Templeton Group or the dollar amount of fund and
private account assets under management in advertising materials.
FINANCIAL STATEMENTS
The financial statements contained in the Trust's December 31, 1994
Annual Report to Shareholders are incorporated herein by reference.
<PAGE>
APPENDIX
DESCRIPTION OF BOND RATINGS
MOODY'S INVESTORS SERVICE
Aaa: Bonds which are rated Aaa by Moody's Investors Service Inc.
("Moody's") are judged to be of the best quality. They carry the smallest
degree of investment risk and are generally referred to as "gilt edge."
Interest payments are protected by a large or by an exceptionally stable margin
and principal is secure. While the various protective elements are likely to
change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by
all standards. Together with a Aaa group, they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds because
margins of protection may not be as large as in Aaa securities or fluctuation
of protective elements may be of greater amplitude, or there may be other
elements present which make the long-term risks appear somewhat greater than
the Aaa securities.
A: Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper-medium-grade obligations.
Factors giving security to principal and interest are considered adequate,
but elements may be present which suggest a susceptibility to impairment
some time in the future.
Baa: Bonds which are rated Baa are considered as medium-grade
obligations, (I.E., they are neither highly protected nor poorly secured).
Interest payments and principal security appear adequate for the present, but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative
elements; their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very moderate and,
thereby, not well safeguarded during other good and bad times over the
future. Uncertainty of position characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of
the desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the security over any long period of time may
be small.
Caa: Bonds which are rated Caa are of poor standing. Such
securities may be in default or there may be present elements of danger with
respect to principal or interest.
Ca: Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have other
marked shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds
are regarded as having extremely poor prospects of ever attaining any real
investment standing.
Absence of Rating: Where no rating has been assigned or where a
rating has been suspended or withdrawn, it may be for reasons unrelated to
the quality of the issue.
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities that are
not rated as a matter of policy.
3. There is a lack of essential data pertaining to the issue or
issuer.
4. The issue was privately placed, in which case the rating is
not published in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances
arise, the effects of which preclude satisfactory analysis; if there is no
longer available reasonable up-to-date data to permit a judgment to be
formed; if a bond is called for redemption; or for other reasons.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each
generic ratings classification from Aa through B in its corporate bond rating
system. The modifier 1 indicates that the security ranks in the higher end
of its generic rating category; the modifier 2 indicates a mid-range ranking;
and the modifier 3 indicates that the issue ranks in the lower end
of its generic rating category.
<PAGE>
STANDARD & POOR'S CORPORATION
AAA: Debt rated "AAA" by Standard & Poor's Corporation ("S&P") has
the highest rating assigned by S&P. Capacity to pay interest and repay
principal is extremely strong.
AA: Debt rated "AA" has a very strong capacity to pay interest
and repay principal and differs from the higher rated issues only in a small
degree.
A: Debt rated "A" has a very strong capacity to pay interest
and repay principal although it is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than debt in the
highest rated categories.
BBB: Debt rated "BBB" is regarded as having an adequate capacity
to pay interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing circumstances
are more likely to lead to a weakened capacity to pay interest and repay
principal for debt in this category than in higher rated categories.
BB, B, CCC, CC, C: Debt rated "BBB", "B", "CCC", "CC" and "C" are
regarded, on balance, as predominantly speculative with respect to capacity
to pay interest and repay principal in accordance with the terms of this
obligation. "BB" indicates that the lowest degree of speculation and "C" the
highest degree of speculation. While such debt will likely have some quality
and protective characteristics, these are outweighed by large uncertainties
or major risk exposures to adverse conditions.
BB: Debt rated "BB" has less near-term vulnerability to default
than other speculative issues. However, it faces major ongoing uncertainties
or exposure to adverse business, financial, or economic conditions which
could lead to inadequate capacity to meet timely interest and principal
payments. The "BB" rating category is also used for debt subordinated to senior
debt that is assigned an actual or implied "BBB-" rating.
B: Debt rated "B" has a greater vulnerability to default but cur-
rently has the capacity to meet interest payments and principal repayments.
Adverse business, financial, or economic conditions will likely impair
capacity or willingness to pay interest and repay principal. The "B" rating
category is also used for debt subordinated to senior debt that is assigned
an actual or implied "BB" or "BB-" rating.
CCC: Debt rated "CCC" has a currently indefinable vulnerability
to default, and is dependent upon favorable business, financial and economic
conditions to meet timely payment of interest and repayment of principal. In
the event of adverse business, financial or economic conditions, it is not
likely to have to capacity to pay interest and repay principal. The "CCC"
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied "B" or "B-" rating.
CC: The rating "CC" is typically applied to debt subordinated to
senior debt that is assigned an actual or implied "CCC" rating.
C: The rating "C" is typically applied to debt subordinated to
senior debt which is assigned an actual or implied "CCC-" debt rating. The
"C" rating may be used to cover a situation where a bankruptcy petition has
been filed, but debt service payments are continued.
CI: The rating "CI" is reserved for income bonds on which no
interest is being paid.
D: Debt rated "D" is in payment default. The "D" rating is
used when interest payments are not made on the date due even if the
applicable grace periods has not expired, unless S&P believe that such
payments will be made during such grace period. The "D" rating also
will be used upon the filing of a bankruptcy petition if debt service
payments are jeopardized.
Plus (+) or Minus (-): The ratings from "AA" to "CCC" may be
modified by the addition of a plus or minus sign to show relative standing
within the major rating categories.
NR: Indicates that no rating has been requested, that there is
insufficient information on which to base a rating, or that S&P does not rate
a particular type of obligation as a matter of policy.
DESCRIPTION OF PREFERRED STOCK RATINGS
MOODY'S INVESTORS SERVICE
aaa: considered to be a top-quality preferred stock. This rating
indicates good asset protection and the least risk of dividend impairment
within the universe of preferred stocks.
aa: considered a high-grade preferred stock. This rating
indicates that there is a reasonable assurance that earnings and asset
protection will remain relatively well maintained in the foreseeable future.
<PAGE>
a: considered to be an upper-medium-grade preferred stock.
While risks are judged to be somewhat greater than in the aaa and aa class-
ifications, earnings and asset protection are, nevertheless, expected to be
maintained at adequate levels.
baa: considered to be medium-grade, neither highly protected nor
poorly secured. Earnings and asset protection appear adequate at present but
may be questionable over any great length of time.
ba: considered to have speculative elements and its future
cannot be considered well assured. Earnings and asset protection may be very
moderate and not well safeguarded during adverse periods. Uncertainty of
position characterizes preferred stocks in this class.
b: generally lacks the characteristics of a desirable invest-
ment. Assurance of dividend payments and maintenance of other terms of the
issue over any long period of time may be small.
caa: likely to be in arrears on dividend payments. This rating
designation does not purport to indicate the future status of payments.
ca: speculative in a high degree and is likely to be in arrears
on dividends with little likelihood of eventual payments.
c: lowest rated class of preferred or preference stock. Issues
so rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
Moody's applies numerical modifiers 1, 2 and 3 in each rating class-
ification: the modifier 1 indicates that the security ranks in the higher
end of its generic rating category; the modifier 2 indicates a mid-range
ranking; and the modifier 3 indicates that the issue ranks in the lower end
of its generic rating category.
STANDARD & POOR'S CORPORATION
"AAA": This is the highest rating that may be assigned by S&P to a
preferred stock issue and indicates an extremely strong capacity to pay the
preferred stock obligations.
"AA": A preferred stock issue rated "AA" also qualifies as a high-
quality fixed-income security. The capacity to pay preferred stock
obligations is very strong, although not as overwhelming as for issues rated
"AAA."
"A": An issue rated "A" is backed by a sound capacity to pay the
preferred stock obligations, although it is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions.
"BBB": An issue rated "BBB" is regarded as backed by an adequate
capacity to pay the preferred stock obligations. Whereas it normally
exhibits adequate protection parameters, adverse economic conditions or
changing circumstances are more likely to lead to a weakened capacity to make
payments for preferred stock in this category than for issues in the "A"
category.
"BB", "B", "CCC": Preferred stock rated "BB", "B", and "CCC" are
regarded, on balance, as predominantly speculative with respect to the
issuer's capacity to pay preferred stock obligations. "BB" indicates the
lowest degree of speculation and "CCC" the highest degree of speculation.
While such issues will likely have some quality and protective characteristics,
these are outweighed by large uncertainties or major risk exposures to adverse
conditions.
"CC": The rating "CC" is reserved for a preferred stock issue in
arrears on dividends or sinking fund payments but that is currently paying.
"C": The preferred stock rated "C" is a non-paying issue.
"D": A preferred stock rated "D" is a non-paying issue with the
issuer in default on debt instruments.
NR indicates that no rating has been requested, that there is
insufficient information on which to base a rating, or that S&P does not rate
a particular type of obligation as a matter of policy.
Plus (+) or Minus(-): To provide more detailed indications of pre-
ferred stock quality, the ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
<PAGE>
DESCRIPTION OF COMMERCIAL PAPER RATINGS
MOODY'S INVESTORS SERVICE
The term "commercial paper" as used by Moody's means promissory
obligations not having an original maturity in excess of nine months.
Moody's employs the following three designations, all judged to be
investment grade, to indicate the relative repayment capacity of rated issuers:
Issuers rated PRIME-1 (or related supporting institutions) have a
superior capacity for repayment of short-term promissory obligations.
Prime-1 repayment capacity will normally be evidenced by the following
characteristics:
- Leading market positions in well-established industries.
- High rates of return on funds employed.
- Conservative capitalization structures with moderate
reliance on debt and ample asset protection.
- Broad margins in earnings coverage of fixed financial
charges and high internal cash generation.
- Well-established access to a range of financial markets and
assured sources of alternate liquidity.
Issuers rated PRIME-2 (or related supporting institutions) have a
strong capacity for repayment of short-term promissory obligations. This
will normally be evidenced by many of the characteristics cited above but to
a lesser degree. Earnings trends and coverage ratios, while sound, will be
more subject to variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions. Ample alternate
liquidity is maintained.
Issuers rated PRIME-3 (or supporting institutions) have an
acceptable capacity for repayment of short-term promissory obligations. The
effect of industry characteristics and market composition may be more pro-
nounced. Variability in earnings and profitability may result in changes in
the level of debt protection measurements and the requirement for relatively
high financial leverage. Adequate alternate liquidity is maintained.
Issuers rated NOT PRIME do not fall within any of the Prime rating
categories.
STANDARD & POOR'S CORPORATION
S&P's commercial paper rating is a current assessment of the like-
lihood of timely payment of debt having an original maturity of no more than
365 days. Ratings are graded into four categories ranging from "A" for the
highest quality obligations to "D" for the lowest. The four categories are
as follows:
A: Commercial paper rated "A" is regarded as having the great-
est capacity for timely payment. Issues in this category
are delineated with the numbers 1, 2 and 3 to
indicate the relative degree of safety.
A-1: Commercial paper rated "A-1" is regarded as having a very
strong degree of safety regarding timely payment. A "+"
designation is applied to those issues rated "A-1"
which possess an overwhelming degree of safety.
A-2: Commercial paper rated "A-2" is regarded as having a strong
capacity for timely payment; however, the relative degree of
safety is not as high as for issues designated "A-1".
A-3: Commercial paper rated "A-3" is regarded as having a
satisfactory capacity for timely payment. They are,
however, somewhat more vulnerable to the adverse
effects of changes in circumstances than obligations
carrying the higher designations.
B: Commercial paper rated "B" is regarded as having only an
adequate capacity for timely payment and such capacity may
be damaged by changing conditions or short-term adversities.
C: Commercial paper rated "C" is regarded as having a doubtful
capacity for repayment.
D: Commercial paper rated "D" is for a payment default. The
"D" rating is used when interest payments or principal
payments are not made on the date due even if the applicable
grace period has not expired, unless S&P believes that such
payments will be made during such grace period.
